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Implementing EU anti-money laundering legislation in Cyprus

The EU Fourth Anti-money Laundering Directive (2015/849/EC) was adopted on May 20 2015 and must be transposed into domestic legislation by EU member states by June 26 2017. It replaces the EU Third Anti-money Laundering Directive (2005/60/EC). The EU Fifth Anti-money Laundering Directive is a set of proposed amendments to the EU Fourth Anti-money Laundering Directive that looks to strengthen its core provisions in light of recent terrorist activity in Europe. The European Union aims to finalise the EU Fifth Anti-money Laundering Directive by June 2017.

Cyprus implements EU anti-money laundering directives through the Prevention and Suppression of Money Laundering Laws 2007 to 2013. The Advisory Authority for Combating Money Laundering (a public-private industry representative body established under the Prevention and Suppression of Money Laundering Laws) is working with the local industry to transpose the EU Fourth Anti-money Laundering Directive and (in due course) the likely changes under the EU Fifth Anti-money Laundering Directive through amendments to domestic legislation.

The transition from the EU Third Anti-money Laundering Directive to the EU Fourth Anti-money Laundering Directive has long been awaited, bearing in mind the passage of time and developments in the financial services industry since 2005.

EU and Cypriot anti-money laundering legislation

The EU First Anti-money Laundering Directive (91/308/EEC) provided for the initial EU anti-money laundering framework and focused primarily on drugs-related offences. It introduced obligations on credit and financial institutions to verify the identity of their customers and report concerns of money laundering. Further, it established the following key preventative measures that are now treated as standard:

obtaining customer identification and due diligence before entering into a business relationship; and

Cyprus was not an EU member state in 1991, so it did not transpose the EU First Anti-money Laundering Directive. However, as a ratifying party to both the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the 1990 Council of Europe Convention on the Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, Cyprus remained at the cutting edge of anti-money laundering legislation through the Confiscation of Proceeds of Trafficking of Narcotic Drugs and Psychotropic Substances Law 1992. This law was repealed and replaced by the more comprehensive Prevention and Suppression of Money Laundering Activities Law 1996. The Council of Europe's First Mutual Evaluation Report (1998) described Cyprus as being "significantly in advance of any other country in its geographic sub-region" regarding its anti-money laundering regime.

The EU Second Anti-money Laundering Directive was issued in December 2001. It widened the scope of predicate offences and businesses covered to ensure compliance with Financial Action Task Force (FATF) developments. Of particular importance was the expansion of the regime beyond credit and financial institutions to cover professions such as lawyers and accountants. Rules were also developed to target terrorist financing following 9/11. No amendments were made to the Prevention and Suppression of Money Laundering Activities Law 1996 to reflect changes under the EU Second Anti-money Laundering Directive. However, the Council of Europe's Second Mutual Evaluation Report (2001) noted that:

"Cyprus has made further progress towards building an effective and robust anti-money laundering regime. With the exception of the legal professions, there is a strong commitment from all institutions in the system, including the private sector, to join the anti-laundering effort."

The EU Third Anti-money Laundering Directive was issued in October 2005 and introduced the concept of a risk-based evaluation of anti-money laundering and terrorist financing with distinctions made for the first time between standard due diligence and enhanced due diligence measures depending on the customer's risk profile. The directive consolidated the regime against terrorist financing as a central principle of pan-EU anti-money laundering policy. Cyprus joined the European Union on May 1 2004 and fully implemented the EU Third Anti-money Laundering Directive in 2007 within the standard two-year window following its adoption at EU level.

Implementation of EU Fourth Anti-money Laundering Directive in Cyprus

The Advisory Authority for Combating Money Laundering is tasked with preparing amendments to the Prevention and Suppression of Money Laundering Laws in order to implement the EU Fourth Anti-money Laundering Directive in Cyprus. The Advisory Authority is established as a formal consultative body under the primary legislation.

Legislative processes Since the EU Fourth Anti-money Laundering Directive was published in 2015, the Cyprus-based Advisory Authority has been coordinating amendments to the legislation with the relevant industry supervisory authorities (principally the Cyprus Central Bank and the Unit for Combating Money Laundering). Together, the various authorities have produced a draft bill to amend the Prevention and Suppression of Money Laundering Laws to comply with the EU Fourth Anti-money Laundering Directive. The draft is likely to anticipate necessary additions from the EU Fifth Anti-money Laundering Directive.

The bill is due to be released to the public as part of a consultation by the Ministry of Finance and the Advisory Authority at the end of the first quarter of 2017. Interested parties will have an opportunity to review and suggest changes to the bill, which is expected to be enacted before the end of the transposition period.

Extent of anticipated changes As part of its ongoing peer review by Moneyval (the regional sub-group of FATF of which Cyprus is a member), the Prevention and Suppression of Money Laundering Laws have been subject to significant scrutiny following changes to FATF's International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation Recommendations and Moneyval's Fourth Round of Evaluation and Biennial Update on Cyprus issued in November 2013. As such, many of the changes required under the EU Fourth Anti-money Laundering Directive have been implemented in Cyprus, such as the inclusion of domestic politically exposed persons and the reduction of the threshold for ultimate beneficial owners holdings from 25% to 10% (which is not strictly required under the EU Fourth Anti-money Laundering Directive, but was a provisional requirement of a previously discarded version of the EU Fifth Anti-money Laundering Directive prepared by the European Commission).

However many additional changes are required – in particular:

the creation and development of ultimate beneficial owner registers in Cyprus to comply with the EU Fourth Anti-money Laundering Directive's central register requirements; and

the expansion of the definition of 'obliged entities' to include gambling services beyond casinos and the imposition of the Cyprus National Betting Authority as a new supervisory authority.

Ultimate beneficial owner registers A key element of the EU Fourth Anti-money Laundering Directive is that member states must produce centralised ultimate beneficial owner registers. Cyprus has maintained information on shareholders of Cypriot companies for many years as part of the data filed with the registrar of corporate affairs, as well as information on ultimate beneficial owners. Company directors and secretaries (usually service providers in the case of foreign interest companies) have a legal obligation to maintain and update ultimate beneficial owner information on the companies or trusts with which they are involved under anti-money laundering and combating terrorist financing legislation and the Law Regulating Companies Providing Administrative Services and Related Matters 2012. However, under the directive's requirement for ultimate beneficial owner registers:

Cyprus companies will need to declare ultimate beneficial owners in registers, in addition to shareholders; and

As the precise rules governing the establishment of these registers are yet to be finalised at EU level, disagreements on scope have surfaced between the EU Commission and the EU Council. The Cyprus government is likely to establish the necessary systems and infrastructure only once the rules have been agreed. However, at present it is expected that the register will be stored as part of a commercial register or existing company register, in line with the suggestions made by Article 30(3) of the EU Fourth Anti-money Laundering Directive. It is unlikely that Cyprus will 'gold plate' the directive's requirements that the ultimate beneficial owner register be available to the public, especially bearing in mind that the European Data Protection Supervisor has issued a recent opinion that casts doubt on the legality of such a policy.(1)

Under the latest version of the EU Fifth Anti-money Laundering Directive, ultimate beneficial owner registers must be established within 36 months following the directive's publication.(2)

Comment

Much of the EU Fourth Anti-money Laundering Directive is consistent with pre-existing calls for greater focus on risk-based due diligence and know-your-client techniques encouraged under:

FATF's International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation Recommendations; and

the Organisation for Economic Cooperation and Development and International Monetary Fund programmes that stress the importance of transparency in the financial sector to prevent money laundering, terrorist financing and associated criminal conduct.

Cyprus is on course to achieve full compliance in this regard.

However, the requirement to establish centralised ultimate beneficial owner registers is new. Disagreements exist at an institutional level between the EU Commission and the EU Council regarding the extent and scope of this obligation. Further, in light of the European Data Protection Supervisor's comments in its 2017 opinion, it seems unlikely that the EU will impose mandatory requirements on member states to provide for public access.

Further, considering that EU anti-money laundering legislation is implemented through directives rather than regulations, it is not unimaginable to expect additional divergences to evolve between member states – in particular, whether such registers are in practice made public. While Cyprus is expected to implement the requirements on time and in compliance with EU requirements, it is not expected that Cyprus will rush to introduce a central register before the mandatory requirement arises or that such a register will need to be made available to the public.(3)

(1) The European Data Protection Supervisor issued its opinion on February 2 2017 regarding the compatibility of the proposals for access to ultimate beneficial owner registers with EU-origin data protection laws. The findings support the idea that the EU Commission's proposals for more open or public access under the EU Fifth Anti-Money Laundering Directive may be incompatible with EU data protection laws.